John Hussman: Fund Performance Past, Present and Future

Excerpt from the Hussman Funds' Weekly Market Comment (1/14/08):

The following is a small version of our regular performance chart.

click to enlarge

The returns of the S&P 500 in recent years have been disproportionately attributable to energy, basic materials, capital goods, and other companies with poor stability in earnings and balance sheets. We've held some of these (particularly oil companies), but due to the unpredictability of their long-term cash flows, their valuations have a large speculative and commodity-driven component. Despite the excitement about growth from China and other “BRIC” countries, I've been averse to placing a large portion of shareholder assets at risk in companies that strike me as cyclical and commodity plays...

Meanwhile, since I am not willing to invest a major portion of shareholder assets in materials, industrial cyclicals and commodity plays, true believers in these sectors will be best served making those investments elsewhere. With a few exceptions (which we are willing to hold), many of the stocks in these sectors that can be valued on the basis of probable future cash flows appear significantly overvalued because of an optimistic view that the world economy is somehow “decoupled” from the United States. Others are simply impossible to value without forming pointed expectations about the future long-term path of oil, nickel, potash and other commodity prices. We have had good success trading precious metals shares over the years, but because large share transactions can have a significant price impact, these are largely confined to the Strategic Total Return Fund...

As of last week, the Market Climate for stocks was characterized by unfavorable valuations and unfavorable market action. Frankly, I am surprised that the market's compressed oversold condition has not resulted in a material “clearing rally”... In bonds, the Market Climate last week was characterized by unfavorable yield levels and moderately favorable yield trends. The Strategic Total Return Fund continues to carry a duration of about 2 years, mostly in TIPS, with just over 20% of assets invested in precious metals shares, for which the Market Climate continues to be very favorable on our measures. That said, precious metals shares are volatile enough that I reserve positions much beyond 25% of assets for periods when these shares are also significantly oversold. As a result, I would expect to periodically clip our exposure to this sector on further strength, not because of negative expectations for the sector, but simply to keep our risk well managed.